Insights

Were service charge changes a winning formula

It is 15 years since the current service charge consultation regime entered the statute book. Georgina Redsell reflects on its effectiveness

Property practitioners will have noticed the upward trend of regulation on landlords where failure to comply can result in serious financial loss or criminal sanctions: the Minimum Energy Efficiency Standards and right to rent, for example. The detail of the obligations is not always clear from the outset and consequently even those with the best intentions can unwittingly fall foul of the law.

Section 20 of the Landlord & Tenant Act 1985 (“the 1985 Act”), as substituted by the Commonhold and Leasehold Reform Act 2002, and the accompanying Service Charges (Consultation Requirements) (England) Regulations 2003 are a good example of how detailed regulations still failed to fully contemplate the practicalities of property management. The courts and tribunals have had to fill in the gaps and, while we now know much more than we did 15 years ago when the enabling legislation was first introduced, there are still unanswered questions.

For those unfamiliar with its provisions, the 1985 Act provides that if a landlord intends to recover money towards “qualifying works” or a “qualifying long-term agreement” (“QLTA”) from tenants it must first comply with the consultation requirements set out in the regulations (see box). If the landlord fails to do so, it will be limited as to what can be recovered, unless dispensation is obtained.

Who must be consulted

Notices have to be served on any recognised tenants’ associations and “each tenant”. “Each tenant” is undefined, but it has been held to mean any tenant of a dwelling liable to contribute to the relevant costs through their service charge. That seems straightforward enough, but questions arise when dealing with multi-layered ownership structures or mixed-use premises.

Sub-tenants

It was not clear for some time who was obliged to consult where a head landlord wished to carry out major works. Some practitioners took the view that it was good enough to serve notices on the intermediate landlord and allow sufficient time for it to consult with its sub-tenants.

Only very recently did the Upper Tribunal determine that a superior landlord must consult with sub-tenants (Lessees of Foundling Court and O’Donnell Court v Camden London Borough Council [2016] UKUT 366 (LC); [2016] EGLR 59). There are, of course, practical difficulties with this conclusion because a superior landlord will not necessarily have the details of sub-tenants, nor will it know if there are any recognised tenants’ associations. The tribunal suggested that it would be sufficient to deliver a notice addressed to “the leaseholder” to each flat in the building. Alternatively, sub-tenants’ details can be requested from the intermediate landlord or the superior landlord can apply for dispensation.

Tenants of mixed-use property

By contrast, the position in respect of mixed-use property remains relatively complex. In 2007, the Court of Appeal determined that someone may be the tenant of a “dwelling” even if his tenancy includes non-residential property. However, property of a residential type will not be considered a “dwelling” for this purpose if it is let wholly or mainly for business use.

The Leasehold Valuation Tribunal in Buckley v Bowerbeck Properties Ltd[2009] 1 EGLR 43 held that property which consisted of a commercial ground floor and a basement residential flat would not fall within the service charge consultation regime, because the residential and commercial parts were connected internally and under the lease they could not be occupied separately. As the residential part of the property could not be considered separate, the tenant was not a tenant of a “dwelling” within the meaning of the 1985 Act.

If property is made up of residential and business areas that are physically connected, the consultation requirements are unlikely to apply. However, each individual case should be considered carefully given the potential financial consequences of failing to consult.

Buildings under construction

For developers, there is the potential headache where flats are purchased off-plan and contracts which may be QLTAs need to be entered into. An agreement is not a QLTA if, when the agreement is entered into, there are no tenants of the premises to which the agreement relates and the agreement is for a term not exceeding five years.

The procedure

Section 20 applies to qualifying works where the relevant costs incurred in carrying out the works exceed £250 per tenant and to QLTAs where the relevant cost incurred under the agreement in a 12-month period exceed an amount which results in a service charge contribution of more than £100 by any tenant. There are four main obligations on a landlord who intends to carry out qualifying works.

The landlord must:

Issue a notice of intention which describes the proposed works, the reason for considering the works necessary and inviting responses within 30 days;

Obtain a minimum of two estimates;

Issue a second notice summarising at least two of the estimates, setting out any observations received and responses, and inviting observations in relation to the estimates within 30 days; and

Consider the observations but is otherwise free to enter into a contract for the works with a contractor nominated by a tenant or with the contractor who supplied the lowest estimate. Otherwise the landlord must serve a third notice within 21 days of entering into the contract.

The obligations in respect of a QLTA are similar.

The High Court in BDW Trading Ltd[2013] 3 EGLR 139 held that the consultation requirements do not apply to agreements (whether or not for a period of more than five years) in relation to buildings which have not yet been constructed and/or are not let at the time of the agreement. The basis of that decision appears to be because of the non-existence of consultees but the position where there are agreements for lease in place is undecided.Given that failure to consult or obtain dispensation may mean that the landlord would be limited in recovering £100 per tenant per year over the term of the QLTA, then out of an abundance of caution it would be wise to consult with prospective tenants.

Waiver of the right to forfeit

Another issue is whether the service of a consultation notice would act to waive a landlord’s right to forfeit in respect of once and for all breaches of covenant. To amount to waiver the landlord has to perform an “unequivocal” act that recognises the continued existence of the tenancy.Where a landlord is serving each and every tenant with the same notice, can he be said to be waiving the right to forfeit? There are no cases on this point and so landlords must consider whether they are willing to take the risk of a potential waiver of the right to forfeit.

Scope of works

There are also pitfalls when it comes to preparation of the notices, which warrants an article in itself. Some landlords have breached the consultation requirements by increasing the scope of works between service of the notice of intention and the second notice. In 23 Dollis Avenue (1998) Ltd v Vejdani and another[2016] PLSCS 236, the Upper Tribunal found that every one of the estimates included work that went beyond the proposed works set out in the notice of intention and so the landlord had not complied with the regulations.

Dispensation

However, it has not all been bad news for landlords. The consultation requirements are subject to a right to seek dispensation from them.

For a long time, tribunals and courts took a very strict line on dispensation and distinguished between what were perceived as serious failings and technical, excusable oversights. No doubt the collective sigh of relief from landlords was audible when the Supreme Court delivered its decision in Daejan Investments Ltd v Benson[2013] UKSC 14; [2013] 2 EGLR 45. It was held that the purpose of the consultation requirements is to ensure that tenants are protected from paying for unnecessary works or services and/or paying more than they should. Therefore, the issue the tribunal should focus on is the extent to which (if any) the tenants are prejudiced in either respect by a failure to comply with the consultation requirements.

Whether prejudice means purely financial prejudice is uncertain, but landlords can seek comfort from the fact that in many instances dispensation is likely to be granted, albeit with conditions attached.

Greater clarity

The position is clearer than it was 15 years ago and undoubtedly the regulations have increased the burden on residential landlords and property managers. However, the regulations are a good example of the need for there to be sensible enforcement, with opportunities for sanctions to be waived in appropriate cases.

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